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A Whiff Of Energy Prosperity May Be All We Get

The nascent boom in natural gas drilling is bringing a whiff of prosperity to long-depressed regions of Ohio and Pennsylvania, two states that President Obama would dearly love to carry in this year’s re-election campaign.

You might expect the president to encourage the trend, or at least to take credit for the results, which include the recent return of steel manufacturing to Youngstown, Ohio. All he needs to do is say that he wants hydraulic fracturing, the technology that makes the gas development possible, to be brought into wider use as long as environmental risks are properly managed.

But even this modest step is a bridge too far for the president, who worries about losing the environmental vote even as he tries to persuade the nation’s breadwinners that their prospects will eventually improve if he remains in office.

Obama’s conundrum is that environmental groups, an important Democratic constituency, oppose nearly all carbon-based energy development, while labor unions, another important Democratic voting and fundraising bloc, support it. Obama’s natural inclination seems to favor the environmental side - witness yesterday’s news that the administration is prepared to block the Keystone XL oil pipeline - but Obama would also like to avoid alienating labor, at least until Election Day.

Hydraulic fracturing, or “fracking,” is a technique in which chemical-laced water and sand are blasted underground to break apart rock and release natural gas. It promises to make accessible significant amounts of the nearly 500 trillion cubic feet of natural gas that may be contained in the Marcellus Shale, which underlies much of Pennsylvania, New York, Ohio, West Virginia and adjacent states. It also promises to make large gas reserves accessible in the Utica shale formation elsewhere in Ohio, and in other shale deposits in Texas and elsewhere. But despite the growing importance of fracking, the president has yet to articulate a coherent position on the technology.

Landowners in the Marcellus Shale region have received up to $5,200 an acre, plus royalties of as much as 20 percent. Wages in natural-gas-related industries in Pennsylvania average $76,036, compared with the state average of $46,222, according to the Pennsylvania Center for Workforce Information and Analysis.

As oil and gas companies invest more money in the region, the economic benefits will only increase. “This will be the biggest thing to hit the state of Ohio economically since maybe the plow,” Aubrey K. McClendon, chief executive officer of Chesapeake Energy Corp., the most active driller of oil and natural gas in the U.S., said during an energy summit in September. On the other hand, environmentalists have made fracking a central concern, citing the possibility of groundwater contamination.

Most environmentalists are Obama supporters, so the president does not need to do much to win their votes. But he does need to avoid losing them, which an overly enthusiastic public endorsement of hydraulic fracturing might do.

So until the election is over, the president is trying to stall any decision-making. This is exactly the same strategy he tried to employ on the Keystone XL oil pipeline, which would carry Canadian crude oil to U.S. refineries, helping to boost the United States’ new status as an exporter of refined petroleum products. But congressional Republicans forced the president’s hand on Keystone XL by attaching a deadline for the administration’s decision to the legislation that extended reduced Social Security taxes into the first two months of 2012.

As I have written before, it will take careful monitoring and strong, clear policy to ensure that we can reap the benefits of fracking technology while minimizing its risks. Critics argue that hydraulic fracturing is not yet adequately understood. But contrary to some of their claims, fracking is nothing new. My firm has managed a drilling partnership on behalf of some of our clients for the past seven years, and throughout that time, the operators of our wells in Texas and New Mexico have used hydraulic fracturing to increase production from the small, tightly locked oil and gas reserves of the Permian Basin.

What is new is the dramatic increase in the scale and power of fracking methods, and the application of this technology to shale formations situated in relatively populous areas. These changes bring with them increasing concerns about health hazards and environmental damage.

The risks of hydraulic fracturing, and other aspects of oil and gas development, are real. It would be irresponsible for any company to ignore them. So far, to the best of my knowledge, no major player has. The chemicals used in hydraulic fracturing can contain toxins such as benzene or 2-Butoxyethanol, commonly called 2-BE, which could prove dangerous if they seeped into groundwater supplies. A study released in May confirmed that the hydraulic fracturing process itself has yet to be linked to drinking water contamination, but poor well construction at hydraulic fracturing sites has, in some cases, caused methane to leak into water supplies.

The risks, however, are outweighed by the benefits, at least in my mind. In addition to providing a boon to the economies of states in the shale regions, and a boost to their tax revenues, hydraulic fracturing has the potential to open up a significant domestic source of clean-burning fuel. Natural gas can substitute for oil in home furnaces, power plants, local buses and some delivery vehicles. The more we produce and use natural gas, the less we will be forced to depend on oil and the major oil-producing nations - many of which, apart from Canada, are notably unfriendly toward the United States and its allies.

Increased domestic fuel production reduces the leverage long held by foreign fuel exporters. The recent concern over Iran’s threat to block the Strait of Hormuz is a prime example of why we need to diversify our fuel sources as much and as quickly as possible. Russia, too, has used the reliance of other, mainly European, countries on its oil to get its way politically.

A smart administration could develop policy that encourages investment in new production, but with an acceptable margin of environmental safety. Unfortunately, that is not the sort of administration we have seen in Obama’s first term, and it does not seem likely that we would get that sort in a second term, either.

A leader who keeps his policy preferences under wraps is not leading. We have good reason to believe that this is just a temporary problem, however. Once freed of his re-election worries, Obama would probably make his energy preferences perfectly clear. Unfortunately, what we have seen from this president thus far makes it seem likely that he will favor the hypothetical energy of theoretical large-scale solar and wind power over the tangible BTUs that fracking could produce from America’s very real and very large shale deposits.

Larry M. Elkin is the founder and president of Palisades Hudson, and is based out of Palisades Hudson’s Fort Lauderdale, Florida headquarters. He wrote several of the chapters in the firm’s recently updated book, Looking Ahead: Life, Family, Wealth and Business After 55. His contributions include Chapter 1, “Looking Ahead When Youth Is Behind Us,” and Chapter 4, “The Family Business.” Larry was also among the authors of the firm’s book The High Achiever’s Guide To Wealth.

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